Oil prices showed some moderation on Monday, following a 2% hike in the previous session. Investors were seemingly unperturbed by the effects of the recent production cuts announced by Russia, the world’s third-largest oil producer.
Instead, the market was more focused on short-term demand concerns such as refinery maintenance in both Asia and the United States.
Russia had announced a 5% cut in its crude production, equivalent to 500,000 barrels per day, as a response to western restrictions on its exports. The cuts were a result of the ongoing conflict in Ukraine. Despite this news, Brent crude futures fell 0.8% to $85.70 per barrel, while U.S. West Texas Intermediate crude dropped 0.9% to $79.04 per barrel.
An analyst from ING, Warren Patterson, stated that the dip in prices could be attributed to the market’s realization that these cuts were already largely priced in. Despite this dip, both contracts saw more than an 8% increase last week, driven by the optimism surrounding China’s demand recovery. As the world’s top crude importer and second largest oil consumer, the removal of COVID restrictions in December has been a major factor in the improvement of China’s oil demand.
Stefano Grasso, a senior portfolio manager at 8VantEdge in Singapore, pointed out that the cuts would bring Russia back in line with its OPEC+ quota, as Moscow had been over-exporting. The Organization of the Petroleum Exporting Countries (OPEC) and its allies, including Russia, had agreed to reduce production by 2 million barrels per day, or 2% of global demand, in October.
Despite the short-term concerns, OPEC country officials have expressed their belief that oil prices will resume their upward trend and reach $100 per barrel later this year. This is due to China’s demand recovery and limited supply growth as a result of a lack of investment. On the other hand, the United States, the world’s largest oil producer, saw an increase in operating oil rigs by 10 to 609 last week, the largest weekly addition since June.
While the recent cuts in Russia’s oil production made headlines, the market has shifted its focus to short-term demand concerns. Despite this, there is a general optimism that oil prices will continue to rise later this year on the back of China’s demand recovery and limited supply growth.